(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Jan 27 Rig counts are a highly imperfect
guide to future oil production but they are one of the few
readily available statistics on oilfield activity so it is
unwise to dismiss their importance entirely.
The sharp drop in crude oil prices since June 2014 and
associated fall in rig counts published by state regulators and
service companies such as Baker Hughes has sparked a lively
debate about the short-term outlook for U.S. oil production.
Some analysts have forecast the drop in rig counts will
cause production to peak in the first six months of 2015 then
begin to fall in the second half of the year. I count myself in
Other analysts predict production will remain steady or
continue to grow, albeit much more slowly than the 1 million
barrel per day (bpd) increases recorded in 2013 and 2014.
In practice, the differences are smaller than the two sides
imply. Most forecasters put the change in daily production
between December 2014 and December 2015 at less than 250,000
bpd, whether up or down.
For example, the U.S. Energy Information Administration
(EIA) predicts output in December 2015 will be just 90,000 bpd
higher than in December 2014 ("Short-Term Energy Outlook" Jan
That would be a marked slowdown from the 1.28 million bpd
increase between December 2013 and December 2014 or the 790,000
bpd increase between December 2012 and December 2013.
At a rough approximation, most forecasters expect U.S.
production to be flat in 2015 - after two years of 1 million bpd
growth, during which time North American shale producers were
the marginal suppliers to the world oil market.
And every forecast for U.S. oil production contains an
implicit forecast for what will happen to oil prices over the
course of the year.
EIA thinks the number of active drilling rigs in the United
States will fall by 24 percent between January and October 2015
before starting to recover in November.
That forecast is based on its assumption WTI prices will
increase to an average of $53 per barrel by June and $67 in
WTI prices have so far averaged just under $48 so far in
2015, so EIA's forecasts for rig counts and production are
conditioned on a $20 price increase by the end of the year.
NOT JUST RIG COUNTS
U.S. oil production "reflects more than just the rig count,"
as EIA emphasised in a research note published on Monday
analysing the combined effect of all the factors known to affect
output. The note is essential reading for anyone trying to
understand the likely production trend in 2015.
In fact, oil production reflects a constellation of factors,
of which the most important are:
1. The number of rigs employed (raw rig count).
2. The speed with which rigs are able to drill wells on
average (affected by the time lost moving location and setting
up, incidents causing stoppages and type of rock drilled
3. Efficiency and capability of the rigs (maximum operating
depth and available horsepower).
4. Average vertical depth of wells drilled and length of
5. Speed with which wells, once drilled, are pressure pumped
and completed, so they can start producing.
6. Quality of the rock in the neighbourhood of newly drilled
and completed wells, affecting production rates.
7. Average number of stages fractured in each well (which
can range from 10 to 30 or more).
8. Average production from the wells during the first 30 or
60 days and decline rates thereafter as natural energy in the
9. Decline rates on production from old wells (average age
and decline rates on the stock of existing wells drilled in both
shale plays and conventional oil fields).
10. Wellhead oil prices relative to the full life-cycle
breakeven costs of drilling new wells.
Rig counts are just one of many factors which determine
production. Experts are right to remind readers that production
is about much more than "just the rig count". In a sense every
well and every drilling team is different and the impact on
production is complicated. Some simplifications must, however,
be made for the sake of analysis.
COPING WITH A CRASH
In the face of a steep decline in oil prices, production
companies have a number of strategic options to cut costs and
The least-efficient rigs and crews can be idled first. The
remaining rigs can be pulled from exploration work in frontier
areas (where recoveries are uncertain) to focus on development
work and infill drilling in existing plays (where likely
production is more certain).
Within existing plays, rigs can be pulled back from the
periphery to concentrate the most high-yielding "sweet spots".
Production companies can negotiate and likely obtain big
reductions in hire rates for rigs and pressure pumping equipment
as well as the price of all their other inputs, from water and
sand to diesel and trucking.
For all these reasons, the number of new wells and the
output from them is likely to fall more slowly than the rig
At the same time, breakeven prices for new wells will come
down substantially to reflect cheaper drilling and pressure
In some instances, however, producers may postpone the
completion of already drilled wells to defer the costs and hope
for a recovery in prices.
Completion accounts for two-thirds of the total cost of some
of the very long horizontal wells now being developed. And one
third of the well's total production may occur in the first 12
months. So there are sharp financial incentives to slow
completion where possible.
There is a substantial backlog of oil wells that were
drilled in 2014 waiting for the arrival of pressure pumping
crews and other completion services. U.S. production could
continue rising for several more months as these wells are
finished and put into production.
But there are also anecdotal reports from oilfields that
some completions are being postponed to save costs and wait for
a more favourable price environment. If widespread, slower
completions could cause production to peak earlier than
DATA AVAILABILITY BIAS
While production forecasts are about much more than just rig
counts, rig counts are one of the few pieces of data readily
available in near real-time. There is no comprehensive and
timely information on drilling speed, well depth and horizontal
length, initial production rates, and decline rates on the stock
of existing wells.
There is some information on the number of new wells started
("spudded") each month but that is only marginally more helpful
than a rig count because production depends on where the wells
are located and how many horizontal stages are fractured, among
Focusing on the rig count introduces a data availability
bias into production forecasts. But since it is almost the only
comprehensive and timely information on drilling activity,
forecasters do not have much choice. Rig count data must be
interpreted carefully but it would be unwise to ignore it
On balance, the safest conclusion is that U.S. shale
producers will be able to offset some of the fall in oil prices
by drilling more efficiently, and that the amount of new oil
produced per rig employed can be increased.
But the efficiency improvements are unlikely to fully offset
the decline in prices and rig counts, at least in the short
For that reason, it seems reasonable to assume U.S. shale
production will be fairly flat in 2015, give or take a couple of
hundred thousand barrels per day, after several years of
(Editing by David Evans)